The future of oil

New market dynamics created by climate change, geological and geopolitical pressures will transform our hydrocarbon economies, write John Elkington and Gary Kendall. From
ChinaDialogue, part of the
Guardian Environment Network

The race for the world's remaining oil reserves could get very nasty. Recently, Nigerian militants announced their determination to oppose the efforts of a major Chinese energy group to secure six billion barrels of crude reserves, comparing the potential new investors to "locusts". The Movement for the Emancipation of the Niger Delta told journalists that the record of Chinese companies in other African nations suggested "an entry into the oil industry in Nigeria will be a disaster for the oil-bearing communities".

Whatever the facts, the end of the first decade of the twenty-first century is likely to be seen by future historians as the beginning of the final chapter of a unique, unrepeatable period in human development. Even oil companies now see the Age of Oil in irreversible decline – even if that decline spans decades. International oil companies (IOCs) increasingly accept that they must transform themselves completely – or expire – by mid-century.

Superficially, the so-called "super majors" appear to be in good health. Fortune's Global 500 list places the "big six" – Shell, ExxonMobil, BP, Chevron, Total, and ConocoPhillips – among the seven largest corporations in the world, as measured by 2008 revenues. In third place, Wal-Mart stands alone as the only top seven company not dedicated to finding, extracting, processing, distributing and selling the liquid transportation fuels that drive the global economy, although few business models are as dependent on the ready availability of relatively cheap oil.

Worryingly for such companies, 2008 may prove to have been the high water mark for the global oil industry, with geological, geopolitical and climate-related pressures now creating new market dynamics. The oil question is now, more than ever, a transport question. Cheap and reliable supplies of transportation fuel are the very lifeblood of our globalised economy. So it matters profoundly that we are entering an era in which oil supplies will be neither cheap nor reliable.

For the likes of Shell, BP, and ExxonMobil, whose rates of liquid hydrocarbon production peaked in 2002, 2005, and 2006 respectively, the current economic paradigm requires them to replace reserves. Investors primarily value IOCs on this basis, as well as their ability to execute projects on time within budget. A key problem for the IOCs is that petroleum-rich countries feel increasingly confident in the ability of their own national oil companies to steward their domestic resources. So generous concessions once offered to IOCs in return for technical and managerial expertise are now deemed unnecessary.

The imperative to satisfy investor expectations fuels an increasingly risky growth strategy, which drives IOCs towards energy-intensive (and potentially climate-destabilising) unconventional oil substitutes, such as tar sands (in Canada), gas-to-liquids (in Qatar), and coal-to-liquids (in China and elsewhere). These pathways are not chosen as ideals: they are more or less reflexive responses to external market pressures.

Meanwhile, the uncomfortable fact is that our economies are addicted to liquid hydrocarbon transport fuels, the consumption of which creates a catalogue of negative side effects. And we cannot hope to address this addiction by way of our "dealers" developing even more damaging derivatives of the same drug.

As if that were not enough, there is the hot topic of "peak oil", defined as the point at which global oil production reaches a maximum rate, from where it steadily declines. The basic principle is uncontroversial: production of a finite non-renewable resource cannot expand endlessly, and this has been demonstrated in practice at national level all over the world. The heated debate centres on the point at which the peak in global oil production is likely to be reached.

"Early toppers" argue that the peak has already been passed, and that the world will never produce more than 85 million barrels per day. By contrast, "late toppers" point to the huge scale of unconventional reserves – for example, Alberta's tar sands resource is vast – that remain untapped, as well as the potential bounty locked away in frontier regions such as the Arctic Ocean, where global warming is opening up new areas for oil and gas exploration.

Unfortunately, what matters is not the absolute size of these unconventional and frontier resources, but the rate at which they can be developed and brought to market. By definition, this is the "difficult" oil. Production rates are determined by a series of significant financial, social, and environmental constraints that raise grave concerns for the viability of a global economic system made possible by liquid transport fuels.

At the same time, leaders of all the major economies finally acknowledge what scientists have long been warning: to avoid catastrophic climate-change impacts, the global average surface temperature increase must be limited to 2° Celsius compared with the pre-industrial era. To stand any reasonable chance of avoiding a 2° Celsius rise, our best understanding of the climate change science suggests that global greenhouse-gas emissions must peak within the next five to 10 years, and then decline by more than 80% on 1990 levels by 2050. Realistically, meeting this requirement will demand that we engineer a transition to a zero-carbon energy system by mid-century.

So what might a zero-carbon energy system look like? As well as dramatic improvements in the energy efficiency of buildings and appliances, and massive deployment of sustainable renewable energy technologies, we will no longer be allowed to burn fossil fuels without capturing and sequestering the carbon dioxide emissions. This implies that we must restrict our use of fossil fuels to stationary facilities, such as power plants, where carbon capture and storage (CCS) is practical (see "Outlook and obstacles for CCS"). Strikingly, a zero-carbon energy system will also mean that no liquid hydrocarbon fuels, with the exception of biofuels, can be consumed in mobile applications such as transport.

This does not make pleasant reading for international oil companies. Their core business today may be described as: digging geological carbon resources out of the ground, converting those resources into liquid fuels, then marketing those fuels to consumers who set them on fire in internal combustion engines to move around. By 2050, these activities will all be considered to be strikingly primitive.